Debt Reduction and New Loans: A Contracting Perspective

International debt contracts can incorporateat least implicitlycontingencies governing debt reduction. This paper examines a series of debt contracts that allow for the possibility of rescheduling, forgiveness, and rescheduling with forgiveness. The contract with both rescheduling and forgiveness permits a higher credit ceiling than other types of debt contracts, and contains features found in the HIPC and other recent debt reduction initiatives. If an adverse state of nature occurs, some of the debt is forgiven, a portion is rescheduled, and the remainder is repaid. At the same time, the debtor country is a net recipient of new loans.

Keywords: International Debt, Rescheduling, Forgiveness

JEL Classification: F34

Suggested Citation: Suggested Citation

Carlson, John A. and Husain, Aasim and Zimmerman, Jeffrey A., Debt Reduction and New Loans: A Contracting Perspective (August 1997). IMF Working Paper No. 97/95, Available at SSRN: https://ssrn.com/abstract=882609